1. International Development Economics Associates Conference on Work and well-being in the 21st century
SAASTA Lecture Hall, The Observatory, Johannesburg, South Africa
Macroeconomics of wage-led growth
Esteban Pérez Caldentey

2. Profit and wage-led growth
What is the effect on macroeconomic performance of a change in income distribution towards profits (gross operating surplus) or wages (labor compensation)?
A profit led regime is one in which a change in favor of profits has a favorable effect on the economy.
If the shift towards profit has a negative effect on the economy, then the economy in question is in a wage led regime
Aggregate impact on the economy
Expansionary
Contractionary
An increase in the profit share
Profit-led growth
Wage-led growth
An increase in the wage share
Wage led-growth

3. Theory: A simple approximation to wage-led

4. 𝐴𝐷=𝐶+𝐼+𝐺+ 𝑋−𝑁 =𝐶+𝐼+𝐺+𝑁𝑋
Wage led regimes are identified on the basis of aggregate demand and supply analysis
Aggregate demand
𝐴𝐷=𝐶+𝐼+𝐺+ 𝑋−𝑁 =𝐶+𝐼+𝐺+𝑁𝑋
𝐶=𝑝𝑟𝑖𝑣𝑎𝑡𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝐼=𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Aggregate supply
𝐺=𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝑁𝑋=𝑛𝑒𝑡 𝑒𝑥𝑝𝑜𝑟𝑡𝑠
𝐴𝑆= 𝐴𝑃 𝐿 𝑀𝑃 𝐿 𝑊 𝑁
𝐴𝑃 𝐿 , 𝑀𝑃 𝐿 =𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑑 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟
𝑊=𝑤𝑎𝑔𝑒 𝑟𝑎𝑡𝑒

5. 𝐴𝐷=𝐶+𝐼+𝐺+ 𝑋−𝑁 =𝐶+𝐼+𝐺+𝑁𝑋
Wage led regimes are identified on the basis of aggregate demand and supply analysis
Aggregate demand
𝐴𝐷=𝐶+𝐼+𝐺+ 𝑋−𝑁 =𝐶+𝐼+𝐺+𝑁𝑋
𝐶=𝑝𝑟𝑖𝑣𝑎𝑡𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝐼=𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Aggregate supply
𝐺=𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝑁𝑋=𝑛𝑒𝑡 𝑒𝑥𝑝𝑜𝑟𝑡𝑠
𝐴𝑆= 𝐴𝑃 𝐿 𝑀𝑃 𝐿 𝑊 𝑁
𝐴𝑃 𝐿 , 𝑀𝑃 𝐿 =𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑑 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟
𝑊=𝑤𝑎𝑔𝑒 𝑟𝑎𝑡𝑒

6. Variables Profit led Wage led
Consumption
No or small differences in propensities to consume
Propensity to consume out of wages is higher than the propensity to consume out of profits
Investment
Investment is a function of profitability.
Accelerator effect not important (related to propensities to cosume)
Investment is not a function of profitability
Accelerator effect is important (related to propensities to consume)
Net exports
Price competition is important
High import income elasticity
Price competition is not important
Low import income elasticity
Government expenditure
Redistributive policies

7. Shifts the entire aggregate demand function
Variables
Profit led
Wage led
Consumption
No or small differences in propensities to consume
Propensity to consume out of wages is higher than the propensity to consume out of profits
Investment
Investment is a function of profitability.
Accelerator effect not important (related to propensities to cosume)
Investment is not a function of profitability
Accelerator effect is important (related to propensities to consume)
Net exports
Price competition is important
High import income elasticity
Price competition is not important
Low import income elasticity
Government expenditure
Redistributive policies irrelevant
Redistributive policies relevant
Changes the slope of the aggregate demand function
Shifts the entire aggregate demand function

8. Empirical evidence

9. Growth of real wages (real compensation per employee)
Correlation between the rate of growth of real wages and GDP
Growth of real wages (real compensation per employee)
Growth of real GDP
Belgium
0.60*
4.3
5.0
1.5
1.7
0.6
4.9
3.6
2.2
2.3
Denmark
0.44*
4.2
1.2
1.6
0.7
1.3
1.9
2.5
0.8
Ireland
-0.03
4.1
4.4
2.4
1.8
4.5
3.5
7.5
5.8
3.1
Greece
0.71*
6.3
3.4
-0.2
0.3
8.5
5.1
2.1
0.9
Spain
0.55*
7.1
-0.5
7.4
2.8
2.9
France
0.65*
5.2
3.7
5.7
3.9
2.0
Italy
6.0
1.1
0.4
0.5
4.0
Luxembourg
-0.05
-0.4
0.1
2.6
4.6
4.7
Netherlands
0.52*
3.2
3.3
1.4
Austria
0.49*
Portugal
0.37*
7.0
5.3
3.8
Finland
0.19**
4.8
Sweden
0.42*
United Kingdom
0.28*
2.7
Norway
0.25*
1.0
-0.1
United States
0.40*
3.0
Japan
0.79*
0.2
10.2
Canada
0.08
Australia
0.15
5.4
Average
0.39*
Median

10. Real Wages and Investment
Country
Real Wages and GDP
Real Wages and Investment
Real Wages and Exports
Low
Frequency
Medium Frequency
High Frequency
Coherence
France
0.5
0.2
0.0
0.4
0.1
United Kingdom
0.7
Canada
0.55
0.15
Germany
Italy
0.25
0.10
Australia
0.3
Japan
0.45
Dynamic Correlation
0.63
0.64
-0.1
0.75
0.60
0.6
0.65
-0,1
-0.5
0.8
-0.2

11. Average duration from peak to peak
Capacity Utilization
Investment
GDP
Consumption
Real Wages
Exports
Average duration from peak to peak
United States
15.3
14.9
30.6
45.7
24.8
22.7
France
13.9
21.7
37. 5
24.7
34.0
16.9
United Kingdom
17.7
13.3
31.7
22.1
20.3
19.9
Canada …
20.2
38.0
42.0
27.3
23.8
Germany
23.6
17.1
22.3
15.4
Italy
14.5
20.8
22.6
15.1
Australia
14.0
18.5
20.4
47.5
25.4
Japan ….
11.8
15.0
12.8
14.7
18.3
Average
18.1
25.2
30.0
18.4
Average Amplitude from trough to peak 6 28 25 37 21 18 4 12 15 10 7 13 9 20 23 14 16 17 8 5 11 24 36
5.4
13.1
15.8
10.4
17.3

12. Real Wages and Capacity Utilization 0.77 0.87 0.51 … 0.63 0.55 0.42
United States
France
United Kingdom
Canada
Italy
Australia
Germany
Japan
Real Wages and Capacity Utilization
0.77
0.87
0.51 …
0.63
0.55
0.42
Real Wages and Investment
0.78
0.73
0.68
0.80
0.70
0.75
0.25
Real Wages and GDP
0.88
0.90
0.72
0.30
Real Wages and Consumption
0.85
0.89
0.74
0.81
0.39
Real Wages and Exports
0.65
0.76
0.79
0.26
0.46
Investment and capacity utilization
0.66
0.38
0.59 ….
Investment and GDP
0.84
0.86
0.69
0.83
Investment and exports
0,62
0.67
0.28
Capacity utilization and GDP
0.52
0.50
0.61
Capacity Utilization and exports
0.64
GDP and exports
0.33
0.96

13. Distribution of wealth Wealth share (top 10%, 5% and 1%)
Consumption
Consumption propensities are different for different income segments and income (and wealth are highly concentrated)
Distribution of wealth (Selected regions, 2018)
Distribution of wealth
Wealth share (top 10%, 5% and 1%)
10% 5% 1%
Africa
89.7
83.8
73.1
48.7
Asia Pacific
90.1
85.9
71.0
40.6
Europe
83.6
70.0
55.4
31.2
LAC
81.9
71.4
60.2
39.2
North America
84.3
74.4
62.1
34.8
Chile: Income shares and GINI with and without capital gains and tax evasion
2004
2007
2012
2013
Share the richest 1%
28.4
30.6
30.0
27.4
Share of the richest 0.1%
12.4
14.8
13.1
13.4
GINI1
0.62
0.59
GINI2
0.55

14. Determinants of investment in Latin America
Commodity prices and in GFCF (1990–2016)
Real exchange rate and GFCF (1995–2017)
Period
Correlation coefficient
0.9890
0.3795
Correlation coefficient: -0.41
Monetary policy rate and GFCF (2005–2017)
Economic activity and GFCF ( )
Country
Correlation coefficient
Period
Argentina
-0.37
2005–2017
Brazil
-0.17
2004–2017
Chile
0.25
Colombia
-0.02
2006–2017
Mexico
-0.28
1994–2017

15. The external sector
The available empirical evidence and my own estimates point to the importance of income effects and the insignificance of relative price effects.
Histogram of the variation of the effective real exchange rate (2010=100) for a sample of 93 countries
(annualized quarterly data) ).
Histogram of the variation of exports and imports in volume (2010=100) for a sample of 176 countries (anual data, )

16. The external sector
The distinction between GDP and income.
Income (the sum of the wage bill and profits) can be expressed as a function of the domestic product (GDP), net factor payments to the rest of the world ( 𝑁𝑃𝑅𝑊 𝑡 ), and current transfers ( 𝐶𝑇 𝑡 ) and the terms-of-trade effect (TTE) ( 𝑋 𝑡 𝑃 𝑥 𝑃 𝑚 −1 ).
𝑊𝑁 𝑡 + 𝐵 𝑡 = 𝐺𝐷𝑃 𝑡 + 𝑁𝑃𝑅𝑊 𝑡 + 𝐶𝑇 𝑐 + 𝑋 𝑡 𝑃 𝑥 𝑃 𝑚 −1
Profit share for selected Latin American countries (2002, 2006, 2010 and 2014). In percentages.
Countries
2002
2006
2010
2014
Argentina
65.4
58.5
,,,
Bolivia
59.4
65.6
67.7
65.7
Chile
53.3
60.9
59.8
55.9
Colombia
62.8
64.0
63.4
63.0
Paraguay
63.9
67.3
65.5
Peru
72.6
75.8
66.6
65.0
Venezuela
66.4
67.6
58.6

17. Diferential between Income and GDP as percentage of GDP (Selected economies of LA)
Bolivia
Chile
Peru
Colombia

18. Annual rates of change of income and GDP for selected LAC countries
Bolivia
Chile
Colombia
Peru

19. Global Banks as rentiers in the commodities markets
“Until recently, Morgan Stanley controlled over 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JPMorgan built a copper inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of copper, comprising nearly 60% of the available physical copper on the world’s premier copper trading exchange, the LME. In 2012, Goldman owned 1.5 million metric tons of aluminum worth $3 billion, about 25% of the entire U.S. annual consumption. Goldman also owned warehouses which, in 2014, controlled 85% of the LME aluminum storage business in the United States. Those large holdings illustrate the significant increase in participation and power of the financial holding companies active in physical commodity markets.” United States Senate Permanent Subcommittee on Investigations in their report on Wall Street Bank involvement with Physical Commodities (November, 2014, p.3)